As financial services sectors around the world undergo regulatory reform, a shift towards rules-based regulations threatens to challenge the traditional standard of fiduciary duty underlying financial advice, representatives from international industry associations said on Tuesday.

Andrew Strange, director of policy for the Association of Independent Financial Advisors in the United Kingdom, and David Tittsworth, executive director of the Investment Adviser Association in the United States, agreed that the nature of financial services regulation has swung from a principles-based focus to a rules-based focus.

Speaking at the Dealer Advisor Forum in Toronto, Tittsworth noted that in the United States, current reform proposals would harmonize the regulations facing investment advisors and broker-dealers. He pointed out that organizations such as FINRA have called for greater regulatory consistency between advisors and brokers. In particular, broker-dealers are calling for all industry players to be subject to a “new federal standard” instead of the fiduciary standard under the Investment Advisers Act.

But the fiduciary culture facing financial advisors has been an important hallmark of the industry, Tittsworth argued.

“[Fiduciary standard] involves the duty to put the interest of your clients ahead of your own at all times, it’s a duty of loyalty,” he said. “It has created a higher standard of care for financial advisors.”

He said imposing broker-dealer rules on investment advisors would lead to more burdensome, detailed rules for advisors. It would also be costly and would lead to a greater compliance burden, he said.

“We think there are better alternatives,” said Tittsworth.

Instead of extending broker-dealer rules to cover investment advisors, the Investment Adviser Association calls for brokers who provide investment advice to be subject to the fiduciary standard facing advisors.

Tittsworth noted that specific rules, such as suitability requirements, are not comprehensive enough. Such rules fail to incorporate potential conflicts of interest that are required to be disclosed to clients under the fiduciary standard.

In the United Kingdom, an example of the trend towards rules-based regulation includes pending changes that will raise the level of qualifications required for financial advisors. Imposing new rules on qualifications won’t necessarily ensure greater competence among advisors, according to Strange. He said workplace assessments and other measures would be more effective, yet regulators are focused on qualifications.

Tittsworth agreed that while qualifications are important, they don’t ensure competency or ethical standards among advisors.

Ultimately, Tittsworth said regulation of financial services must achieve a balance between principles and prescriptive rules.

“I think what we all need and want are regulations that make sense, that are not too burdensome, not overly prescriptive, but sometimes you need enough definition so that you know what you can and cannot do,” he said.

IE